The stock market might be pulling out of the doldrums due to hopes of a rate cut and improved monsoon projections. After a week of range-trading very close to the 200-Day Moving Average (200-DMA), the Nifty made an upside breakout on Monday. The breakout is not decisive, since the index is less than one per cent above the simple 200-DMA.
Breadth was positive, and volumes were good. Foreign institutional investors (FIIs) continued to be net sellers but the volume of foreign selling eased. There has been considerable buying from the domestic institutions, which has counter-balanced the FII selling.
This rally started from a low of 7,997 on May 7. It has now moved till 8,385. The short-term trend seems positive. But resistance will be seen at every 50-point interval on the upside. The upmove would have to push past 8,850 (the peak of April 15 was 8,844) to generate higher highs and confirm an intermediate uptrend. As and when it does beat the all time high of 9,119 (March 4), it will confirm the big bull trend.
The past correction went for 1,122 points or about 12 per cent across 8 weeks. This is time enough for an intermediate downtrend to have completely played out. The index would also have to stay above 7,997 on the next dip to break a bearish pattern of lower lows since the last two dips were 7,997 (low May 7) and 8,144 (low, April 30). Ideally, the Nifty should find support above the 200-DMA. The exponential 200-DMA is at 8,192, while the simple DMA is around 8,303.
The Q4 results look disappointing. Parliament has ended its extended session and, while the Budget Session was not very satisfactory, the chances of sentiment being political driven are reduced. The main reason for stronger local sentiment is the hopes of policy rate cuts from the Reserve Bank of India (RBI). Inflation is falling and the Index of Industrial production was weak in March and indeed IIP was low through the 2014-15 financial year.
The central bank meets on July 2. The past two rate cuts were both out-of-turn, in that RBI did not wait for a policy meet. If it does cut early again, there will be a boost for sentiment. Otherwise, traders will bid the market up till July 2 because consensus heavily favours a cut at the moment. On the external front, crude prices remain worth watching. So, do forex rates. The rupee is pulling back from above 64 versus dollar but the pound could see some hardening.
The financial index, the Bank Nifty, is liable to outperform until July 2, at least. A bullspread of long 18,500c (273) and short 19,000c (103) costs 170 and it could pay a maximum of 370. The Bank Nifty is perfectly capable of moving till 19,000 in two big sessions and it could go further. The response to State Bank of India's Q4 results (due on May 22) could be a big pointer.
The Nifty's put-call ratios look healthy enough at about 1.12 for May and 1.19 for three months. The May Call chain has open interest (OI) peaking at 8,500c with ample OI till 8,800c. The May Put OI has triple peaks at 8,000p, 8,100p, 8,200p but it is ample till 7,800p.
There are nine sessions left and volatility is likely to stay high. A bullspread of long 8,500c (45), short 8,600c (21) costs 24 and pays a maximum 76. This is about 125 points from money. A bearspread of long 8,300p (73), short 8,200p (45) costs 28 and has a maximum payoff of 72. This is about 75 points from money. Strangles would be asymmetric.
